More Margin Pressure Ahead
The era of low-to-zero interest rates on top of struggling household income levels led to the proliferation of zero-rate financing on everything from cars to hot tubs to luggage and electronics. With the Federal Reserve raising rates amidst less than robust retail sales, rising credit card balances and weak income growth, retailers will be pressured to maintain these incentives.
Now, with interest rates climbing, the cost of these arrangements will rise, pinching profits at companies that derive a large chunk of their sales from shoppers who prefer to pay in bite-size pieces. Most retailers will likely absorb the higher costs to stay competitive because customers may turn elsewhere if they are asked to pony up interest charges.
While price-to-earnings ratios have continued to expand in the Trump Trade, now at levels well above historical norms, we are seeing more indications of pressures on margins, which means those earnings may be weaker than expected. On top of the impact of rising interest rates, we may start to see some wage pressures, which would also weigh on margins. If that is the case, those multiples will look even richer. With earnings season right around the corner, the Tematica Team will be closely watching margin trends as corporate profits have been declining in recent quarters as a percent of GDP.
Source: Fed Rate Increase Makes 0% Financing Deals More Pricey for Retailers – WSJ
